Annuities Glossary

401(k)

An employer-sponsored retirement savings plan that lets employees withhold and invest a portion of their income before it is taxed. From an employer-selected list of investment options, employees choose how they want their money invested. Employers sometimes contribute to employees’ 401(k) plans based on a percentage (such as contributing 50 cents for every dollar an employee invests).

403(b)

A tax-deferred retirement savings plan similar to a 401(k), but aimed at teachers and employees of some non-profit organizations. Participants contribute to either annuity contracts (often called a TSA) with insurance companies, or directly with mutual fund companies.

Accumulation Unit Value (AUV)

For Variable Annuities only. An annuity’s subaccount price per share during the accumulation phase. An AUV is the net asset value after income and capital gains have been included and subaccount management expenses have been subtracted. Many insurance companies keep daily charts for the tracking of AUV’s and also offer performance summary sheets.

Accumulation Phase

The accumulation phase is the period when an annuity owner can add money and accumulate assets in a tax-deferred manner. Now that the national trend is individuals wanting to save money for retirement, it is common for people to ask, “How am I doing?” This really means, “Will I have enough to retire on—because I don’t want to run out.” Understanding the accumulation phase can better prepare you to avoid confusion as you save money for your retirement.

Annual Gift

An annual gift is a donation that is made every year and is a way to provide significant tax savings for many individuals. Annual gifts provide ongoing support for university campuses, schools, departments, and other programs or organizations. An annual gift is often associated with annuities.

Application for Benefits

To receive Social Security benefits, Supplemental Security Income (SSI) payments, or Medicare, you must complete and sign an application.

You can apply for retirement, disability, Medicare, and spouse’s benefits online, in person at a local Social Security Office, or by telephone at 1-800-772-1213. The TTY number is 1-800-325-0778.

Annual Insurance Fee

For Variable Annuities only. An annual insurance fee covers mortality and expense risk charges and other administrative expenses. It also provides for a guaranteed death benefit and for lifetime guaranteed income payouts. Annual fees are usually smaller than upfront charges and are often considered less important, but this isn’t really the case. The percentage of the annual fee may be small, but remember that your investment or policy may reasonably be expected to grow and, assuming it does, then the amount of money you actually pay in annual management charges grows with it even though the percentage levy remains unchanged. It is important to consider special offer investments; these investments often waive the initial charge but have an annual fee that is considerably higher.

Annual Policy Fee

For Variable Annuities only. An annual policy fee covers the costs of maintaining and administering an account during the accumulation phase. It is often waived, however, when an account’s value reaches a certain level (which is stated in the contract). An annual insurance fee covers mortality and expense (M & E) risk charges and other administrative expenses. It also provides for a guaranteed death benefit and for lifetime guaranteed income payouts.

Annual Subaccount Fee (similar to annual fees)

A fee deducted for fund operating costs, management fees, and other asset-based costs incurred by the fund. This charge is assessed at the subaccount level and is not deducted from policy values.

Annuitant

The person, usually the annuity owner, whose life expectancy is used to calculate the income payment amount on the annuity.

Annuity

An annuity is a contract issued by a life insurance company that provides for tax deferral of investment income until withdrawn from the contract. An annuity can also be referred to as a contract or agreement by which one receives fixed payments on an investment for a lifetime or for a specified number of years.

Annuitization (annuitize)

When you annuitize your contract, you trade the value of your annuity for the issuing company’s guarantee to make payments to you periodically for a certain time or for the span of your lifetime.

Annuity Owner

The annuity owner is the person or people who make decisions about an annuity’s investments. The owner or owners have the rights to make withdrawals from the annuity, surrender or change the designated beneficiary or other terms of the annuity.

Anticipated Initial Investment

The anticipated initial investment is the amount of money you want to invest at the beginning. Most companies have certain minimum initial investment amounts for annuities or other investments.

Averages

An average is an arithmetic mean of a group of stocks designed to represent the overall market or some part of it. An average differs from an index in that it is not weighted. The Dow Jones Industrial Average is the most common average.

Beneficiary

A beneficiary is the person designated to receive payments due upon the death of the annuity owner or the annuitant themselves. Annuities are an example of an investment that can give you peace of mind for your family’s financial future.

Bequest

A bequest may be of a specific sum, a percentage, or the residue of an estate, and may consist of cash, securities, life insurance proceeds, real estate, and/or personal property. A bequest may be made through a will or by a living trust.

Certificate of Deposit (CD)

Short or medium-term, interest-bearing, FDIC-insured debt instrument offered by banks and savings and loans. A low risk investment vehicle with low returns, there is usually an early withdrawal penalty.

Charitable Annuity (Gift Annuity)

A charitable gift annuity is a contract between a donor and a foundation, under which the foundation guarantees payment of an annuity, unlike a trust which pays the annuity from its assets alone. Two features in particular make charitable gift annuities appealing. An individual may specify whether he or she wants an immediate annuity, with payment to begin not later than one year from the date of the gift, or a deferred gift annuity, from which payments are not to begin until a specified future date. In addition, the income stream from such an arrangement can be higher than current market rates.

Compounding of Gains

Interest that is credited to your policy is added to your principal as well as interest credited in prior policy years.

CPI-W (Consumer Price Index)

An index prepared by the U. S. Department of Labor that charts the rise in costs for selected goods and services. This index is used to compute Cost of living adjustments.

Contingent Annuitant

The person who is entitled to receive the annuity benefits based on other specified events.

Cost Basis

Your initial payment/premium(s) paid to a non-qualified annuity is known as the cost basis in your contract. Since it was previously taxed, your cost basis will not be taxed upon withdrawal. If a previous distribution was not fully taxable, the cost basis would be reduced by the amount that was not taxable. For contracts purchased after August 14, 1982, a “withdrawal” must come from earnings first for tax purposes, and any amounts in excess of your cost basis will be taxed as ordinary income (an additional 10 percent “federal income” tax penalty may apply for those less than 59 1/2 years of age) upon withdrawal.

Cost of Waiver

Waiver of premium is a benefit available on qualified life insurance contracts that provides for the waiver or payment of premiums that fall due while the insured is totally disabled. Under a qualified retirement plan, contributions used to purchase waiver of premium benefits are taxable to the plan participant and must be included in gross income in the year in which they are paid.

Current Interest Rate

This is the interest rate that an annuity is paying, including the sum of the base rate, if any, and the bonus rate, if any. The current rate is set by the insurance company at the time of issue and is guaranteed for specific length of time.

Death Benefits

The payment the investor’s estate or beneficiaries will receive if he or she dies before the annuity matures. There are several types of death benefits with variable annuities, including: Current account value or initial investment (whichever is greater), in which the beneficiary receives the value of the annuity when the policyholder dies; Rising floor, in which an investment company guarantees a minimum return on premium deposits, regardless of subaccount investment performance; Ratchet, a benefit equal to the greater of (a) the contract value, (b) premium payments less prior withdrawals or (c) the contract value on a specified prior date; and Stepped-up, which guarantees the account value to the beneficiary as of a particular anniversary date (e.g. every 5 years).

Deferred Annuities (Tax Deferred)

Deferred annuities are annuity contracts for people who want to save on a tax-deferred basis for many years, and then convert to a payout schedule once they retire. Contrary to an immediate annuity, taxes on deferred annuities do not become payable until some years after its purchase. The single premium or regular premiums are capitalized during the deferred period, then the built up capital is converted into an annuity. Deferred annuities typically stipulate that payments be made to the Annuitant at a later date, such as when the annuitant reaches a certain age.

Direct Rollover

This is when an eligible qualified retirement plan or Section 403(b) distribution is moved directly from a qualified retirement plan or Section 403(b) tax-deferred annuity to an IRA or to another qualified retirement plan or Section 403(b) tax-deferred annuity. The individual’s employer will not have to withhold 20% for federal income taxes from a direct rollover.

Effective Interest Rate

The actual annual interest rate that accrues, after taking into consideration the effects of compounding.

Employer Plan or Qualified Plan

A tax-qualified retirement plan is an advantage that an employer establishes to benefit employees. Permissible contributions will depend on the type of plan (such as a defined benefit plan or a profit-sharing plan, including a Section 401(k) plan) and on what the particular employer elects. These plans are highly regulated and subject to significant IRS restrictions.

Endowment

In an endowment fund, the principal is invested and only a portion of the investment earnings is spent. The rest of the earnings are channeled back into the fund, so that the endowment grows over time. In this way, the endowment becomes a perpetual source of funding for whatever the donor wishes to achieve.

Equitable Owner

An equitable owner is the beneficiary of a property held in a trust.

Equity Indexed Annuity

An annuity whose returns are based upon the performance of an equity market index, such as the S&P 500, DJIA, or NASDAQ. The principal investment is protected from losses in the equity market, while gains add to the annuity’s returns.

Excess Contributions to an IRA

An excess IRA contribution is one that exceeds the combined deductible and nondeductible limits established by the IRS. If an excess contribution is not removed prior to the tax return due date (including extensions) by the contributing individual, the excess contribution is subject to the 6% excise tax in the year of contribution. The excess will be carried over and subject to excise tax each year thereafter until it is removed. It is the responsibility of the client to file Form 5329 to calculate his or her penalty.

Exclusion Ratio (Nonqualified Income Annuity)

This is the ratio that determines which portion of an annuity distribution is earnings and which portion is a return of your original investment. Only the portion consisting of earnings is taxable.

Five-Year Annualized Total Return

For Variable Annuities only. This percentage figure reflects annuities subaccounts total return (gain or loss) averaged over 5 years.

Fixed Annuity (Fixed Rate Annuity)

Fixed annuities are savings instruments offered by insurance companies that guarantees principal and a modest interest rate and also offers a stream of fixed payments over the life of the annuitant or owner. The insurer, not the insured, takes the investment risk. Fixed annuities are sometimes called a fixed dollar annuity.

Fixed or Equity Indexed Annuity

A Fixed Indexed Annuity is an annuity based on a statistical indicator, the equity market index, which provides a representation of the value of the securities, which constitute it. An index annuity is a hybrid of both fixed and variable annuities. Indices often serve as guides for a given market or industry and benchmarks against which financial or economic performance is measured. An indexed annuity can be based on the S&P 500, Nasdaq, or the DJIA.

The principal investment into the indexed annuity is protected from losses in the equity market, while gains add to the annuity’s returns. This means that once you make a premium payment, you will never have less in your Fixed Indexed Annuity account than your premium payment, and as the index appreciates in value, so does the Fixed Indexed Annuity. Fixed Indexed Annuities can be a wise choice and become a great source of additional income revenue.

Immediate Annuity

An immediate annuity is an annuity which is purchased with a single payment and which begins to pay out right away. When you purchase an immediate annuity, it is generally with a single lump sum, and your income payments begin within 12 months of the date of purchase. With fixed immediate annuities, your payment from the annuity is based on a fixed interest rate. With variable immediate annuities, your payment is based on the value of the underlying investment, usually a stock portfolio.

After choosing an immediate annuity, the annuity owner determines the schedule of payments. This can be done either monthly, quarterly, semiannually, or annually. Another important decision to make with your immediate annuity is how long the payments will last. The annuity owner can choose to receive payments for a specified period of time, an entire lifetime, or even for the life of a beneficiary.

Individual Retirement Account (IRA)

An IRA is a tax-advantaged personal savings plan that lets an individual set aside money for retirement. All or part of the participant’s contributions may be tax deductible, depending on the type of IRA chosen and the investor’s personal financial circumstances. Distributions from many employer-sponsored retirement plans may be eligible to be rolled into an IRA to continue tax-deferred growth until the funds are needed.

Interest Only Option

A settlement option for annuities in which an individual is paid only the interest on the maturity proceeds. A Form 1099-R is issued in the year the annuity matures, and will report any taxable gain. From that point on, the owner receives interest on the maturity proceeds left on deposit.

Market Value Adjustment

Money Market Portfolio

Your portfolio is a collection of investments all owned by the same individual or organization. A portfolio could contain annuities, stocks, bonds or a 401(k) plan.

Morningstar Rating

A rating of annuity products based on their quality as measured by Morningstar, a leading independent provider of investment information. Annuity subaccounts are rated with 1-5 stars, with 5 being the best possible rating.

Mortality and Expense Risk Charge (M&E)

For Variable Annuities only. A fee for insurance guarantees, including the death benefit, the choice of guaranteed lifetime payout options, and the guarantee that insurance charges will not increase.

One-Year Annualized Total Return

Participant

An individual who participates in a retirement plan sponsored either by his employer or, if self-employed, by himself or herself.

Participation Rate

The amount of the percentage change (which is set by the company) used to determine the amount to be credited to your policy for that year.

Payout Phase or Payout Period

The period during which the money accumulated in an annuity is paid out as regular income payments.

Percentage Change

The change in the S&P 500 Index from the beginning of the term to the end of the term expressed as a percentage.

Periodic Transfer

A changing of ownership, such as real estate, a security, or a financial account, from one party to another, or a movement of funds from one account to another.

Premature Distribution

(Premature Distribution Penalty.) Withdrawals made from certain tax-favored plans may be subject to an additional 10% federal income tax if the withdrawal is made before the contract owner reaches age 59 1/2. Certain exemptions do apply. The contract owner should seek legal and tax advice before making plan withdrawals.

Premium Bonus

A Premium bonus is additional money that is credited to the accumulation account of an annuity policy under certain conditions.

Premium Taxes

Some states charge a tax on the contributions made to an annuity. The issuing company generally charges the annuity contract for any premium tax and other taxes based on premium it pays to the state.

Qualified Annuities

Qualified annuities are annuities purchased for funding an IRA, 403(b) tax-deferred annuity, or other type of retirement arrangements. An IRA or qualified retirement plan provides the tax deferral. An annuity contract should be used to fund an IRA or qualified retirement plan to benefit from an annuity’s features other than tax deferral, including the lifetime income payout option, the death benefit protection and, for variable annuities, the ability to transfer among investment options without sales or withdrawal charges.

Rollover

A rollover is a distribution from a qualified retirement plan or Section 403(b) to an individual and then from the individual to another qualified retirement plan, Section 403(b), or IRA. After constructive receipt of the distribution, an individual has 60 days to roll the funds over into another qualified funding vehicle in order for the funds to remain qualified.

Roth Conversion

You can roll over funds from a traditional IRA to a Roth IRA if you meet certain requirements. The taxable amount of the rollover funds will be included in the gross income for the year in which the conversion is made.

Roth IRA

A Roth IRA is a special type of IRA under which distributions may be tax exempt. Individuals may make nondeductible contributions into a Roth IRA if certain income requirements are met. Qualified distributions from a Roth IRA are tax-free.

Source of Funds

Where you’ll get the money you plan to invest. Your source or sources can be qualified or non-qualified. Qualified sources are pre-tax sources such as 401(k) accounts, traditional individual retirement accounts (IRAs), 403(b) retirement plans for teachers, and other employer-sponsored plans. Non-qualified sources are after-tax sources such as cash, mutual funds, certificates of deposit (CDs), money market funds, and exchanges of other non-qualified annuities (1035 exchanges).

Standard & Poor’s (S&P) Rating

Standard & Poor’s analyzes and rates insurance companies’ financial strengths in part on their ability to meet their contractual obligations to policyholders. Standard & Poor’s ratings are in letter grade form as follows:

An insurer rated ‘AA’ has VERY STRONG financial security characteristics, differing only slightly from those rated higher.

A

An insurer rated ‘A’ has STRONG financial security characteristics, but is somewhat more likely to be affected by adverse business conditions than are insurers with higher ratings.

BBB

An insurer rated ‘BBB’ has GOOD financial security characteristics, but is more likely to be affected by adverse business conditions than are higher rated insurers. An insurer rated ‘BB’ or lower is regarded as having vulnerable characteristics that may outweigh its strengths. ‘BB’ indicates the least degree of vulnerability within the range; ‘CC’ the highest.

BB

An insurer rated ‘BB’ has MARGINAL financial security characteristics. Positive attributes exist, but adverse business conditions could lead to insufficient ability to meet financial commitments.

An insurer rated ‘CCC’ has VERY WEAK financial security characteristics, and is dependent on favorable business conditions to meet financial commitments.

CC

An insurer rated ‘CC’ has EXTREMELY WEAK financial security characteristics and is likely not to meet some of its financial commitments.

R

An insurer rated ‘OR’ is under regulatory supervision owing to its financial condition. During the regulatory supervision, the regulators may have the power to favor one class of obligations over others or pay some obligations and not others. The rating does not apply to insurers subject only to non-financial actions such as market conduct violations.

NR

An insurer designated ‘NR’ is NOT RATED, which implies no opinion about the insurer’s financial security and contracts in accordance with their terms.

Standard Deviation (3 year)

For Variable Annuities only. A statistical measure of a subaccount’s range of performance. When an annuity subaccount has a high degree of deviation, chances are greater that it will fluctuate.

Subaccounts

For Variable Annuities only. The various investment portfolios in which your annuity funds are invested. You choose which subaccounts you want your money invested in and how much you want to allocate to each.

Surrender Charges

The charge for withdrawing excess amounts above and beyond the stated terms of the annuity. Surrender Charges would also apply if the contract is terminated before the maturity of the contract. Surrender charges typically are a percentage of the total premium deposited, and the charge decreases to 0 over time, as the annuity gets closer to the date it will mature.

Surrender Value

The surrender value is the amount that is available in cash for loans and that may be available for withdrawals. Accessing Cash Surrender Value may reduce the death benefit and may increase the risk of lapse.

Tax Incentives

Tax incentives allow corporations to receive credits or deductions ranging from 10% to 35% against the cost of equipment or installation to promote renewable energy equipment. In some cases, the incentive decreases over time. Some states allow the tax credit only if a corporation has invested a certain dollar amount into a given renewable energy project. In most cases, there is no maximum limit imposed on the amount of the deductible or credit.

Variable Annuity

With billions of investment dollars going into mutual funds, insurance companies created a competing product called Variable Annuities that allows you to invest your money within investment portfolios called subaccounts. Unlike other annuities, a variable annuity does not guarantee a set rate of interest or earnings, being based instead on fund performance and account averages. However you can buy, sell, and switch funds at any time without incurring taxes until you begin to withdraw your original investment and income after age 59. At that time your gains are taxed as ordinary income. Transfers between your portfolios can also reduce tax burdens.